Rising global supplies limit wheat price prospects

In the face of increasing global competition, U.S. wheat producers are opting to grow other crops that pay better than wheat.

"The world is consuming more and more wheat, and more and more people are producing it," says Jim McCormick, an analyst at Allendale Inc.

USDA estimates 2011 global wheat output at 691.5 million metric tons, up 6% from 2010. Ending global stocks are projected to increase 5%, equal to 30% of production. U.S. stocks are even higher.

The world’s top wheat producers are the European Union, China and India, followed by the U.S. and Russia. Top wheat exporters are the U.S., European Union, Canada, Russia and Australia.

"Last year, Egypt was a huge buyer," McCormick says. "That’s what happened when Russia fell
out of the marketplace." However, Nigeria, Japan, Mexico and the Philippines are consistently the
four biggest buyers of U.S. wheat.

Acreage Trend. Despite the fact that the number of U.S. wheat acres is up slightly, Allendale expects the downtrend in U.S. planted acres to continue in the long term.

U.S. wheat acreage has trended lower since the early 1980s, when exports hit their peak. Genetic investments and therefore yield advancements have favored corn and soybeans, not wheat.

Add a decade of declining domestic demand, and market forces have shifted acreage away from wheat.

Feed Demand. The growth in global wheat production and rising stocks have put enough pressure on wheat prices to boost global feed demand. However, USDA’s January supply-demand report trimmed domestic feed and residual use from the December projection.

Based on feed cost per 1,000 calories fed, "you’re better off to feed distillers’ dried grains," McCormick says, adding that the wheat-corn price spread favors feeding wheat in place of corn.

Slim Prospects for $7 Wheat. Allendale projects U.S. carryover stocks rising to 45% of use in
2012-13, up from 40% this season but below the 48% of 2009-10. USDA estimates the current season average cash price at $7.20, but Allendale projects it to be $6.20, on the way to $5.20 in 2012-13.

"To get to $7, we need a stocks-to-use ratio closer to 30%, and we haven’t seen that in five years," McCormick says. The only quick way to tighten the ratio is with a production problem, he adds.

The Fund Factor. McCormick says funds have been selling wheat because of record supplies and stronger prospects for other investments. Fund positions offer one potentially bullish factor for wheat.

A big swing in currency values or weather could give fund managers a reason to get out of their record short positions. "If you get the funds to push out," McCormick says, "it will become a race to the door and we will get a nice short-covering rally."